Payments for the services of a child under theÂ age of twenty-one who works for his or her parentÂ whether or not in a trade or business, are notÂ subject to federal unemployment taxes (FUTA).Â These exceptions are not the case with aÂ corporation (C or S), even if the corporationÂ is completely controlled by the childâ€™s parents.Â Significant tax shelter is provided throughÂ the employment of children in a sole proprietorship or partnership by shifting income toÂ persons in lower tax brackets. A child is allowedÂ to earn the amount of the standard deductionÂ tax-free every year ($5,700 in 2010). Above thatÂ level, the child can receive income and pay tax atÂ the lower ten percent and fifteen percent rates.
Of course, the employment arrangementÂ must be bona fide, and the compensationÂ must be appropriate for the age and skill set
of the child. But as the child matures, it is reasonable that compensation would increase.Â For a parent who would like to put moneyÂ away for a childâ€™s education, the family business still provides a great opportunity.